COLUMN-U.S. lead market adjusts to life after "Herky": Andy Home

(The opinions expressed here are those of the author, a
columnist for Reuters.)

By Andy Home

LONDON, March 13 The last primary lead smelter
in the United States, one sourcing its raw material from mines
as opposed to scrap, closed at the end of 2013.

The shuttering of Herculaneum in the town of the same name
was a historic moment, bringing the curtain down on 120 years of
lead smelting in Missouri.

Doe Run, which operated the plant, will continue mining lead
for export, producing refined lead from used batteries at its
Boss recycling plant in the same state and, for a while at
least, will keep the refining and alloying operations at
Herculaneum open.

In the global scheme of things the closure of what locals
affectionately call "Herky" will not make a lot of difference.

But it will make a big difference to U.S. lead market
dynamics, increasing the country's import dependence.

It also raises interesting questions as to what sort of
pricing mechanism best suits a country that produces only
secondary lead from recycled batteries.

THE LONG RETREAT

The first lead smelter at Herculaneum was built in 1892 by
the St Joseph Lead Company to treat raw materials from the
Missouri lead mines, which had already been in operation for
several decades.

That was, in the end, the reason the smelter had to close,
although a host of on-line commentators associated with the
National Rifle Association (NRA) lobby might disagree.

"Entirely domestic manufacture of conventional ammunition,
from raw ore to finished cartridge will be impossible", lamented
the "AmmoLand" website ("Last U.S. lead smelter to close,
ammunition manufacturing to feel effects," Oct. 29, 2013)

"The effect on the right to bear arms is obvious", fumed Joe
Wolverton in an article for the New American, going on to warn
that "without ammunition, a gun is just a club". ("EPA closure
of last lead smelting plant to impact ammunition production,"
Nov. 6, 2013).

NRA members can rest assured. Their rifles will still be
able to fire bullets. All the major U.S. ammunition
manufacturers already source their lead from recycled materials.

It was 120 years of continuous lead smelting, not a
back-door attack on the gun lobby, that determined "Herky's"
fate.

The Environmental Protection Agency (EPA) has been intensely
involved in the Herculaneum site for over 10 years and the
original agreement to close the smelter was reached in 2010.

Doe Run experimented with a new electrowinning production
process but decided over a year ago that the costs of building a
full-scale commercial plant were too high.

True, the U.S. has the world's toughest ambient air quality
standards for lead emissions, but it is hardly the only country
that has a problem with production of the toxic metal.

In Australia the Magellan mine, now renamed the Paroo
Station mine, has spent half of its eight-year life in mothballs
because of environmental concerns. And it wasn't even smelting
the stuff.

The closure of Herculaneum is simply part of a long retreat
from primary lead production across the developed world.

IMPORT DEPENDENCE

The world still needs lead for use in automotive batteries
but demand is increasingly met through recycling old batteries.
Lead has the highest recycling rate of any of the industrial
metals.

In the United States secondary lead plants, including Doe
Run's own, produced almost 1.2 million tonnes of refined metal
last year, according to figures from the International Lead and
Zinc Study Group (ILZSG).

That's not enough to satisfy demand in what is the world's
second largest user of the metal after China.

The shortfall is met by imports, which have historically
come mainly from Canada and Mexico. Clearly, that import
dependence is only going to increase with the loss of the
120,000-tonne per year Herculaneum smelter.

Indeed, import flows last year experienced a step-change,
possibly reflecting, at least in part, pre-emptive
stock-building.
*******************************************************
Graphic on U.S. trade in refined lead:
link.reuters.com/mer57v
*******************************************************

U.S. imports of refined lead rose to 503,000 tonnes in 2013
from 352,000 tonnes in 2012, according to ILZSG figures.

Analysts at Barclays Capital, writing in December, estimated
there had been an off-exchange build of around 50,000 tonnes in
lead stocks outside of China in the first three quarters of
2013, "with the majority coming in the U.S." ("Lead: Solving the
off-warrant conundrum", Dec 13, 2013).

What is self-evident is that if there are stocks of lead in
the United States, they are not in the London Metal Exchange
(LME) warehouse system.

LME-registered inventory in the country totals just 2,175
tonnes, split between 1,500 tonnes at Detroit and 675 tonnes at
Los Angeles.

Off-market stocks may provide some cushioning against
Herculaneum's closure but last year's increased imports are
probably an early taster of what to expect going forwards. To
the point that U.S. buyers may have to search further afield for
refined lead units than the two traditional neighbouring
suppliers.

IN THE LOOP

That means that even as U.S. lead production becomes
exclusively scrap-derived in nature, the domestic market will
remain umbilically attached to the international refined lead
market.

And to the international lead price set by the LME.

But for the many operators working within what is a
closed-loop battery supply chain, the "world" price risks
becoming ever less relevant.

For them the most powerful price driver is the availability
of used batteries, not supply-demand fluctuations in the primary
lead market.

A new form of pricing is starting to evolve, most visibly in
the form of a battery scrap reference price as assessed by
Platts, a leading global energy, metals and petrochemicals
information provider.

Launched late 2012 in response to demand from domestic
players, its evolution to date underlines that different
dynamic, as shown in the next graphic.
*******************************************************
Graphic on LME lead price and Platts battery scrap price:
link.reuters.com/nar57v
*******************************************************

This price series is still in its infancy and, of course,
does not offer the same price risk hedging function as a market
such as the LME.

But its very existence hints at a splintering of lead
pricing in the U.S. market, a possible first step towards a
hybrid pricing model with those players exposed to imports
pricing on the "world" primary price and those locked in the
closed-loop secondary market pricing on a "domestic" battery
price.

It's far too early to say how these trends will evolve but
it's all part of life after "Herky" for one of the world's
largest lead users.
(Editing by Anthony Barker)

NEW YORK, Dec 9 A Gabonese man who prosecutors
say acted as a "fixer" for a joint-venture involving the hedge
fund Och-Ziff Capital Management Group LLC pleaded
guilty on Friday to U.S. charges that he engaged in a foreign
bribery scheme.

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